Economic activity continues to maintain a high level, led by consumer and business spending. The agricultural sector is another source of strength, but residential construction is at a lower level. With certain exceptions, inventories appear to be low relative to demand, primarily because of delays of manufacturers in filling orders. Commercial banks report strong loan demand in most categories.

Consumer and business spending are maintaining the rates established in recent months. Purchases of consumer durables, especially freezers and refrigerators, are very strong, and automobile sales are good. The demand for compact cars is particularly strong, and this is attributed partly to concern about gasoline shortages. Demand for large domestic automobiles is somewhat weaker. Business spending for commercial buildings and new equipment shows no sign of slowing. Although some directors expect that the demand for consumer durables will ease later this year, there is no sign of any slowing in overall economic activity.

Agricultural prospects in the District are excellent according to our directors in farming areas. Drought is causing some crop losses for wheat in eastern Oregon and Washington, but otherwise yields are expected to be above average for this crop year. Farm prices are at a record high for most crops, and the resulting high farm income is encouraging heavy purchases of consumer goods and farm equipment.

The only major sector exhibiting weakness is residential construction which is falling off in most parts of the District. In some areas the decline affects apartment construction, as well as single- to four-family residences. A factor in this decline is the high level of interest rates and lack of available mortgage finance at savings and loan associations.

The decline in housing demand is affecting the lumber and plywood industry which is experiencing lower prices. Currently a rail strike in Canada is cutting imports of green lumber and supporting the demand for domestic timber, but when this strike is over, prices are expected to resume their downward trend. The pulp and paper sectors of the forest products industry are facing strong demand, in part caused by the Canadian strike. Domestic mills are running at full capacity. According to one director, supplies should be tight for several years, because new capacity is being added at half the normal growth rate.

Our directors were asked to comment on prospective changes in inventories. Their reports indicate that inventories are low for most manufacturers and many retailers. Only inventories of large model cars are more than adequate. Shortages are most severe in raw materials and semi-finished goods. Copper and steel are in particularly short supply and the order backlog is so great that some steel companies have taken their salesmen off the road. Paper inventories are on the low side but not lumber. Retail inventories except for those products facing strong demand are satisfactory. Although inventory levels are somewhat low, the consensus seems to be that there will be no major buildup of inventories this year. High interest costs discourage large stocks and there is uncertainty, especially by retailers, about long-term business prospects.

District banks report continuing strong demand for loans over most categories. The decline in housing construction has not resulted in a decline in mortgage demand at banks. The run-off of funds at many S&Ls has caused a shift in demand to the banks. The recent increases in time deposit interest rates have allowed most banks to hold their deposits or to limit outflows. Although more individuals are putting funds directly into such market instruments as Treasury bills, the major losses are being experienced by S&Ls, not banks. Some bankers now feel that short-term rates are at their peak and the only question concerns the timing of the downturn.